The Next 100 Years
February 15, 2011In the next twenty years the U.S. will compete with other countries for immigrants. China’s remarkable growth will come to an end and later this century Mexico will challenge the U.S. for dominance of North America. Hard to believe? These are just a few of the provocative ideas in an interesting book I recently read: George Friedman’s "The Next 100 Years". Friedman is a widely respected international affairs expert and the founder and CEO of Stratfor, a leading private intelligence and forecasting firm. The author looks out at the next one hundred years from a historical geopolitical perspective with an eye for nascent trends that will drive the future. Many of these trends are already starting and will impact companies, industries and countries in the next five years. In this article we will touch on three ideas we found interesting, and a few ways they impact our investment thinking.
Idea # 1: The End of the Population Explosion
Over the last two and a half centuries life expectancies have doubled, infant mortality rates have decreased sharply, and the global population has exploded from roughly one billion people in 1750 to six billion in 2000. According to Friedman, “If that trajectory had continued the result would have been global catastrophe. But the growth rate has not accelerated. It has actually slowed down dramatically.” The birth rate has slowed so dramatically that the UN projects the global population will essentially stabilize by 2050 and it may decline after that. Population growth is slowing because women are having fewer children as societies change from agricultural to industrial economies, in which children are more expensive and less needed economically to help on the farm.
With the average birthrate in advanced countries well below the rate needed to maintain a stable population, the populations of many developed countries are projected to significantly decline and grow older over the next forty years. Germany is projected to have 10% fewer people in 2050 than they do today while Japan is projected to lose over onefourth of its population [see chart]. While China is not considered a developed country its population is also projected to decline due to its one child policy. The U.S. is an exception, as our population is expected to continue to grow because of higher birth and immigration rates. However, even though the overall U.S. population will continue to grow, the percentage of workers relative to the overall population is expected to decline.
Advanced economies, including the U.S., will experience a shortage of workers as the working age segment of the population declines according to Friedman. A new concern over a shortage of labor will replace the historical concern over too many workers (high unemployment). While this will be good for unemployment and wages, it will create other challenges. Friedman believes advanced economies will address the shortage in a couple of ways. First, countries will change their immigration policies to stop trying to keep immigrants out, and instead start trying to lure them to come as countries compete for workers. Second, companies will increase the efficiency of the smaller labor force through technology including robotics.
From an investment viewpoint, industries that should benefit include companies that focus on technologies that increase efficiency, robotics, consulting and outsourcing, and the aging population (such as health care). Outsourcing work and jobs from companies in advanced economies to workers in developing countries will continue to grow. Declining populations in advanced economies will make it even more important for companies to expand in emerging market countries to continue to grow as well. Companies that focus on children and youth in advanced economies will face headwinds as those populations decline.
Idea # 2: The Decline of China and Rise of Mexico
Despite China’s remarkable economic development over the last thirty years, Friedman believes that the vast disparities between the wealthy coastal regions and the impoverished interior regions will eventually lead to China’s downfall. He does not think China’s economy is as strong and capitalistic as it appears. Many economic decisions are directed by political rather than market forces and many companies are run to create jobs and political stability rather than to maximize profits. This has caused capital to be inefficiently allocated and resulted in a large number of bad loans. When their economy eventually slows, the backlog of bad loans and unprofitable companies will deepen the downturn, resulting in political instability and unrest. Friedman sees two potential outcomes for China. It will either devolve into a weak central government with semiautonomous regions pursuing their own independent interests, or a strong central government will crack down to impose order, but in doing so will isolate China, curtailing its growth. Combined with its decreasing and aging population, China will be forced to focus on internal issues and will be too weak to play a leading global role.
Unlike China, Friedman believes Mexico will grow stronger in the coming decades. In the short term he believes Mexico will continue to struggle with issues such as the violence and instability created by the drug cartels, its large population outflow, and its past economic problems. However, Friedman believes Mexico will become a significant global power over the next one hundred years for a number of reasons. First, Mexico is already the fifteenth largest economy and the wealthiest major country in Latin America. Mexico is also a major oil producer and exporter and other parts of its economy are growing even faster. Its proximity to the U.S., the world’s largest market, is a strategic advantage. While the populations of most advanced economies are projected to fall, Mexico’s will continue to grow. Mexico will benefit as it supplies labor to the U.S. and other advanced economies experiencing shortages.
However, this will likely create greater tensions between the U.S and Mexico as Mexican immigration increases to meet the American labor shortage. Dealing with unassimilated Mexican immigrants with continuing loyalties to their home country will be a struggle as well. Mexico’s growing strength will challenge the U.S.’s dominance of North America. However, the growing Hispanic population in the U.S. will be an opportunity for American companies that adjust their strategies to reach this market.
Idea # 3: Whoever Controls the Oceans Controls the World
One of the fundamental theories of geopolitics is that whoever controls the oceans controls the world. The U.S. emerged from World War II in control of the world’s oceans, and that continues today. According to Friedman, “The combined naval force of the rest of the world doesn’t come close to equaling that of the U.S. Navy. This has never happened before in human history, even with Britain. There have been regionally dominant navies, but never one that was globally and overwhelmingly dominant. This has meant that the United States could invade other countries — but never be invaded. It has meant that in the final analysis the United States controls international trade.” Given the U.S.’s huge lead and the enormous time and expense to build and operate a navy, Friedman believes the U.S. will continue to control the world’s oceans for decades to come. This naval power translates into political power because most nations depend on the ocean for trade and cannot afford to build and maintain a navy to ensure secure shipping lanes for their trade.
The U.S.’s control of the seas was further augmented by a shift in trade patterns in recent decades. Transpacific trade soared above transatlantic trade for the first time in history, greatly benefiting North America as the center of this trade. While many predict that the U.S. is destined to decline, Friedman reaches the opposite conclusion. “The United States is economically, militarily, and politically the most powerful country in the world, and there is no real challenger to that power.” Looking forward he doesn’t see that significantly changing this century. “The inherent power of the United States coupled with its geographic position makes the United States the pivotal actor of the twentyfirst century.” That along with the U.S.’s better demographic outlook relative to other advanced economies should continue to make the U.S. attractive for businesses and investors in U.S. companies.
Conclusion
Friedman’s book offers some interesting perspectives. While we respect him, he is only one of the many viewpoints we consider. Others we read disagree with some of his conclusions. As investors, we believe there are many potential future realities, not just one. Ideas that are considered foregone conclusions by many (e.g., the U.S. has peaked and is headed for perpetual decline or China is going to take over the world) are worth questioning. Just look at Japan. Not long ago everyone thought Japanese businesses were going to dominate the global marketplace. The future is not a linear trajectory of our past and current circumstances.
As Friedman writes, “When we try to predict the future, common sense almost always betrays us … The most practical way to imagine the future is to question the expected.” As investors, we question the expected and therefore invest with many world-class managers and different perspectives. We believe that by doing this our clients will be well served regardless of which reality unfolds.
